In the current economic downturn, civil construction contractors are feeling the pinch more than other industries. A combination of fixed-price contracts, surging prices, material and labour shortages and supply chain issues are all contributing to the current situation.
Even before the crisis we’re passing now, civil contractors typically operated on thin margins. Now more than ever it’s critical to manage construction costs effectively. In this article the expert team from Varicon construction cost management software share 5 simple tips that you can implement straight away to put your business in the best financial position possible.
Tip 1: Track costs throughout your projects
Construction costs are notoriously difficult to estimate. With many unknowns and things that can go wrong, it’s easy to go over budget and end in the red if a good cost management system isn’t in place.
Many civil construction contractors treat their projects as a single bucket of money with costs going out and progress payments coming in. In reality, every project is a collection of “sub-projects” that each have their own budget. If you go over budget in one area it’s difficult or impossible to make it up in another.
By allocating your costs to these sub-budgets it is possible to identify and correct cost overruns early. The most common causes of cost overruns that we see are inefficiencies that can be corrected through better planning, unidentified changes to scope that can be claimed as variations and errors in the initial estimate which can serve as lessons learned for future projects.
The level of detail that you track at is a trade off between accuracy of the feedback you want and the amount of time taken to properly track. What works well for many of our customers is to track costs at a “cost centre” level – these are high level tasks (eg, bulk earthworks, drainage, concreting, asphalting and overheads). This level is intuitive for onsite personnel and allows tracking of actual vs. budget costs.
Action you can take today: in your project cost tracking system, assign each cost to a “cost centre”. We suggest you keep this simple, at least to start with. Depending on the size of the projects between 5 to 10 cost centres is a good number to target. Make it a habit to capture this every day and regularly assess the cost incurred for each cost centre against budget to make sure you’re on track.
Tip 2: Keep on top of committed costs
Committed costs are costs that you have to pay for goods or services that you have already received. The biggest committed costs on civil construction projects are typically for materials and subcontractors – these costs are often invoiced 4 to 8 weeks or more after the committed cost is incurred.
Many contractors only track committed costs from the time that an invoice is received. This poses several financial risks for contractors.
First, this is a future cost that the business must allow free cash to pay. Your business must ensure sufficient working capital to pay for all of your committed costs. Ironically, many contractors get into trouble because they win too much work and struggle to cover the increased working capital requirement. The first step is to know how much committed costs you actually have.
Second, these costs form part of your project budget. If the amount of committed cost is more than you have budgeted for, you may be experiencing excessive wastage or required quantities may be higher than allowed for in your initial estimate. Either way, you need to fix it as quickly as possible.
Action you can take today: in your project tracking system, capture your estimated 3rd party costs on a daily basis. Keep this as simple as possible so that you’re not creating unnecessary work for your team.
A good practice is to raise purchase orders for your suppliers and subcontractors. These purchase orders serve as a good reference for tracing committed costs. Use your agreed upon rates for calculating a committed cost rate and organise dockets and other supporting information by purchase order. This both informs your management and finance teams of future invoices you can expect to receive and makes reviewing and approving invoices easy when they arrive.
Tip 3: Update tender rates based on actual cost information
The biggest financial risk that contractors face is in pre tender estimating. Overestimate your costs and you’re likely to lose the tender, underestimate and you’ll lose money. However, few contractors have an effective cost management mechanism to ensure that tender estimates reflect real costs.
Each project completed is an opportunity to improve your tender estimating. By tracking your costs against budget this allows you to learn for the next tender to maximise profit margins and reduce the risk of cost overruns.
Action you can take today: once you are tracking your committed costs (Tip 1) you have the foundation for continuous improvement in your estimating. At the end of each project review your actual costs against your original estimate. These are the questions you should be asking and answering:
- What changed since the original estimate?
- What did we get right? What did we get wrong?
- What changes do we need to make to our estimating assumptions for future tenders?
Tip 4: Ensure you’re capturing all variations
At the tender stage there are many assumptions made in design and scope documents. In theory any changes from the tender documents should be picked up and claimed as variations.
In reality contractors overlook many legitimate variations by failing to identify, document and claim them on the jobsite. Without an easy and reliable process for use on the jobsite, you will incur these costs without the additional revenue. Many contractors have reported to Varicon reluctance of site personnel to be assertive when claiming variations out of fear of straining relationships.
To ensure all legitimate variations are claimed, ensure that good records are being maintained throughout your projects. Site notes, photographic records and detailed capture of costs incurred serve as evidence to submit to your customer when the variation is identified.
Actions you can take today: ensure you are keeping good site records for each major project task. These include daily photographic records, notes for works completed each day, labour and equipment hours and materials consumed. Any time that works vary from the original agreement this should also be noted.
By maintaining good records that makes it easier for you to submit a variation request once this change from the original scope is identified. This allows you to have a fact-based conversation, speeding up the variation approval process and protecting the relationship with your customer while ensuring you are properly compensated.
Tip 5: Eliminate duplication of information for better cost management
A significant cost for contractors is the admin time consumed with tracking project expenditures. This cost is often hidden – a part of the daily tasks of personnel in the office and on the jobsite.
Many contractors who do not have a proper cost management software in place report to Varicon that they duplicate the same information up to 5 to 6 times across different systems – paper-based documentation on the jobsite, purchase orders and correspondence with suppliers, excel-based tracking sheets, monthly reports, accounting and estimating software are just some of the examples where contractors are manually transferring information.
As well as this direct cost that your company must bear, each duplication of information creates an opportunity for human error and delays the transfer of information to the people who depend on it to run your business effectively and profitably.
Actions you can take today: review all of your systems and how they connect to each other. Where possible, eliminate paper-based systems and replace them with digital systems. Ideally digital systems to be used on the jobsite should be simple and easy to use for field-based employees and accessible on mobile phones and tablets. Among systems to review are:
- Daily diaries
- Purchase Orders
- Supplier docket management
- Project cost tracking
- Approvals processes
- Management reporting
Cost management in practice
The good news is that you already have the tools you need to get started today. You can implement the above 5 tips using Excel, Google Sheets and other free or low cost systems. Moreover, maintaining these systems will reward your team with greater financial control and fewer unpleasant surprises during the execution of your projects.
If you are running a lean management team or want to give your people the tools to work more effectively, the good news is that the solution already exists to make all of these tasks fast, simple and connected.
Reach out to the team at Varicon for a free consulting session. Our experienced and helpful team will advise you how you can better set up your business to not just survive but thrive during the downturn.